Bruce Helmer and Peg Webb
If you’ve been following the news lately, you’ve probably seen another wave of headlines warning that Social Security could face funding challenges beginning in 2032. While those reports deserve attention, they have also generated unnecessary anxiety — and, in some cases, prompted people to consider claiming benefits earlier than they otherwise would.
That may be one of the most expensive financial decisions a retiree can make.
The reality is that Social Security involves a lot more than just deciding when to claim benefits. It’s one of the largest guaranteed income sources many retirees will ever have, and the filing decision should be coordinated with taxes, retirement withdrawals, spousal benefits, survivor protection, and even estate planning.
Social Security is more than a safety net
Social Security was created in 1935 as a foundation of retirement income — not a complete retirement plan.
Your retirement benefit is based primarily on your highest 35 years of earnings. You can begin collecting benefits as early as age 62, although doing so permanently reduces your monthly payment. For workers born after 1960, full retirement age is generally 67. Delaying benefits beyond full retirement age increases your monthly benefit until age 70.
While the rules seem straightforward, determining the best claiming strategy is anything but.
Should you worry about 2032?
According to the Social Security trustees, the retirement trust fund could become depleted during 2032 if Congress takes no action. That does not mean Social Security disappears. Under current projections, ongoing payroll tax revenue would still be sufficient to pay most scheduled retirement and survivor benefits.
Congress has addressed Social Security financing before, and lawmakers are already discussing possible solutions ranging from bipartisan commissions to changes in payroll tax rules.
For that reason, claiming benefits early solely because of concerns about Social Security’s finances is usually not the best planning approach. A decision that permanently reduces your monthly benefit should be based on your family’s circumstances — not fear generated by headlines.
No single best decision
Consider two couples with very different situations.
In the first example, both spouses are 61, each expects a benefit of about $1,500 per month at age 62, and they have accumulated approximately $1.1 million in retirement and investment assets. Their primary goal isn’t maximizing retirement income. Instead, they hope to preserve as much of their portfolio as possible to pass along to their children.
For a family like this, claiming benefits earlier may be worth discussing. Receiving Social Security sooner could reduce the need to spend investment assets during retirement, potentially leaving more for heirs.
Even then, the tradeoff is significant. Claiming early permanently locks in lower monthly benefits and gives up some of Social Security’s valuable inflation-adjusted lifetime income.
The right question to ask is, “Does claiming early best support our long-term goals?”
Now consider a different couple.
The wife earned substantially more during her career and has a much larger Social Security benefit than her husband. While the husband’s spousal benefit would increase only modestly once she files, delaying her own benefit until age 70 would substantially increase the survivor benefit available if she dies first.
In this case, waiting isn’t primarily about maximizing her monthly check, but providing the surviving spouse with a larger guaranteed income for the rest of his life.
The same Social Security rules produce a very different recommendation because the family’s objectives are different.
Taxes matter, too
Many retirees are surprised to learn that Social Security benefits may be taxable depending on overall income.
IRA withdrawals, capital gains, part-time employment, required minimum distributions, and Roth conversions can all influence how much of your benefit becomes taxable. Likewise, individuals who claim benefits before reaching full retirement age and continue working may temporarily have some benefits withheld under the earnings test.
These tax-planning opportunities serve as reminders that Social Security should be coordinated with the rest of your retirement income plan.
Questions to ask before you file
Before claiming Social Security, ask yourself:
• What would each spouse receive at age 62, full retirement age, and age 70?
• Which spouse is likely to live longer?
• How would the claiming decision affect survivor income?
• Do you need the income today, or can investment assets bridge the gap?
• How will Social Security interact with IRA withdrawals, Roth conversions, and future required minimum distributions?
• Have you incorporated Social Security assumptions into a long-term financial plan?
For many retirees, Social Security will represent one of the few sources of lifetime, inflation-adjusted income they can count on. That’s why the claiming decision deserves thoughtful planning.
The goal should be to choose the strategy that best supports your retirement income, protects your spouse, manages taxes, and helps accomplish the goals that matter most to your family.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Advisory services offered through Wealth Enhancement Advisory Services LLC, a registered investment adviser and affiliate of Wealth Enhancement Group.
